Pieter deVilliers, clickatell Co-founder and CEO.
Motorcycle racing legend Ayrton Senna once said, “You can’t overtake 15 cars when it’s sunny…but you can when it’s raining.” This was the quote Sequoia Capital shared with its founders and the startup community in May 2022, when the markets started spinning.
Stocks, especially technology stocks, are facing a tumultuous time of this year, with some of the big tech stocks losing more than $1 trillion in just three trading days in early May. This is probably due in no small part to the whiplash-inducing macroeconomic factors that companies have been dealing with over the past two years.
While capital injections boosted the economy during the pandemic, now the war in ukraine has worsened the effects of an already limited supply chain, stifling output and leading to higher prices and associated inflation. As consumers succumb to the effects of this, central banks around the world are… raising interest rates to try to keep the rising prices in check.
The increased interest rates, in turn, cause capital to become more expensive, which is of great concern to business leaders and entrepreneurs. As a result, the markets are feeling the pressure, with technology stocks being one of the biggest casualties.
Tough times for fast-growing companies
Capital consuming companies have thrived in recent low-interest-rate environments when debt was cheap and spending was boosted by Covid stimulus packages. Now we see those same companies counting every dollar and implementing layoffs and even layoffs.
In the past, high-growth companies could get away with growth at any cost, knowing that if they ran out of money, they could just raise more. Those days are over. It is now exceptionally difficult for high-growth and risk-funded companies to raise capital in a market where growth is no longer rewarded at all costs.
Even high-growth companies with annual recurring revenues of more than $100 million that have recently raised capital, like us, must reassess how to allocate capital effectively in these new market conditions. We all need to adapt to the ever-changing market conditions and, most importantly, we need to think about the “winter” ahead.
Recalibrate and reduce costs for new market realities
The lessons I’ve learned from managing a growth company in volatile markets, including the 2008 crash and the more recent Covid-19 pandemic, have shown me that a price correction can never take too long.
Responding to an inflationary market requires a new decision tree — one that focuses on how to take advantage of the situation and how the company generates revenue. As a leader, you need to ensure that your spending is focused on the right areas of the business and that you optimize the use of your capital to gain a strategic advantage over competitors who may not be as rich in cash.
One of those considerations is to guarantee a runway for at least the next two years. However, in a volatile market, forecasting and planning become increasingly complex, making these calculations more difficult.
One way to save capital is to rationalize spending areas. For example, you may choose to delay entering a new region in exchange for strengthening your existing markets and delivering your product roadmap.
Another area could be discretionary cuts to marketing and consulting as this has an almost immediate impact and can be less painful to execute.
The third, and often most important area is the workforce. It is also the hardest and most impactful area. The guideline here, as always, is to cut deep enough to cut only once.
What to expect
Growth company leaders will pause and look inward to simplify their operations. We can also expect several trends from the Covid era, such as digital transformation and automation, to continue despite large and medium-sized companies becoming more economical with their spending.
It’s also more important than ever for consumer brands to be where their customers are as consumer spending declines. Convenience, personalization and effortless engagement are more important than ever.
In summary, there is no doubt that survival is most important in the minds of today’s business leaders. We can no longer secure capital and expect to see results in 24 months. Finding ways to conserve capital should be a priority, and this requires a thorough look at how to inject efficiency into your operations.
One thing is certain: entrepreneurs are better equipped than most to navigate these tumultuous waters.